‘Mutual Funds Sahi Hai’: Why SEBI Must Address Hidden Risks
SEBI Chairman released the teaser for a nationwide creative expression contest-SEBI Arth Yatra Contest 2025! (Image SEBI)
Systematic investment plans have become the savings mantra of India’s middle class. But weak regulation could turn this success story into a systemic risk.
By P SESH KUMAR
NEW DELHI, August 23, 2025 — When SEBI’s officers raided a finfluencer academy in Karjat, the images were dramatic — laptops seized, training classes halted, a YouTube “market guru” humbled. The regulator wanted to send a message that investors must be protected from self-styled advisers promising instant riches.
Yet, for all the noise around finfluencers, the bigger danger for ordinary investors lies not in Telegram groups or penny stocks, but in the seemingly safe world of mutual funds.
Mutual funds are now at the very heart of India’s small investor revolution. More than ₹60 lakh crore is parked in these vehicles, with over three crore systematic investment plans (SIPs) channelling household savings into the markets every month.
The ads have done their job: “Mutual Funds Sahi Hai” has become the mantra of the middle class. A schoolteacher in Patna, a shopkeeper in Indore, an IT worker in Bengaluru — all now see SIPs as their ticket to long-term security.
And yet, this miracle rests on fragile trust. If SEBI has blind spots in regulating mutual funds, the risks are not symbolic. They are systemic.
Franklin Templeton: The Day the Doors Shut
The most chilling reminder came in April 2020. Without warning, Franklin Templeton Mutual Fund froze six debt schemes worth ₹26,000 crore. Overnight, three lakh investors found their money locked. These weren’t speculative traders — they were retirees, small businessmen, salaried professionals who had chosen debt funds precisely because they seemed safer than equity.
The problem lay in the portfolios. Franklin had loaded up on illiquid, high-yield bonds that looked fine on paper but had no buyers in a crisis. When redemptions surged during the COVID panic, the schemes simply shut down.
Investors who thought “open-ended” meant they could withdraw anytime discovered otherwise. But all this is with the benefit of proverbial hindsight.
SEBI scrambled to investigate, but the damage was done. It was a brutal lesson: mutual funds are only as safe as the regulations that guard them.
The Gaps That Remain
The Franklin episode was not an isolated fluke. It exposed gaping holes in the regulatory framework.
Debt fund transparency remains weak. Investors rarely know how liquid their schemes really are. A bond can carry an AAA rating and still be unsellable in a crunch.
Valuation is another blind spot. Funds are required to mark their holdings to market, but in thinly traded debt papers, “market price” often means a modelled estimate. In calm times, it creates an illusion of stability. In panic, the illusion collapses.
Then there is mis-selling. Distributors in smaller towns still push schemes based on commissions rather than suitability. Despite SEBI’s disclosure norms, conflicts of interest persist, and first-time investors are often the ones tricked into complex products they don’t understand. Even well-educated and apparently financially literate investors fall into this trap.
Finally, there’s concentration risk. Fund managers, chasing performance, sometimes overload on a handful of corporates or sectors. If one domino falls, the chain reaction can hit lakhs of investors at once. And SEBI is fully aware of all this.
Why the Risk Is Systemic
What makes these gaps dangerous is the scale of the industry today. SIP inflows of ₹22,000 crore a month are not pocket money. They are school fees, medical reserves, and retirement pots. If another Franklin-style freeze were to hit multiple funds at once, the shock could ripple far beyond households into the financial system itself, triggering redemptions, market crashes, and a flight back to bank deposits.
This is the paradox: mutual funds are marketed as the safest way for ordinary Indians to join the growth story. But precisely because of their reach, a regulatory slip-up here could shake confidence not just in funds, but in the entire idea of retail participation in capital markets.
SEBI’s Reactive Reflex
SEBI’s record has been reactive. The Franklin Templeton collapse forced new rules on debt valuations. The IL&FS fiasco prompted tighter scrutiny of infrastructure exposure. The Yes Bank AT-1 bond wipeout — where investors lost ₹8,400 crore after being sold exotic bonds as “just like deposits” — led to belated reforms in disclosure.
Each time, regulation followed crisis. Investors paid first; rules came later.
A Call to Action
If SEBI can stage thunderous raids on finfluencers in Karjat, surely it can apply the same urgency to mutual funds — where the stakes are far higher. What is needed is a bold, preventive agenda.
Funds must be stress-tested the way banks are. Investors should be able to see how their schemes would behave if 20% of assets were suddenly redeemed. Valuation models must be independently verified, not left to fund houses to interpret generously. Mis-selling should draw penalties, not just disclosures, especially in smaller towns where financial literacy is weak. Concentration caps must be enforced so that no scheme can gamble with investor money by piling into a few borrowers. And above all, SEBI must become proactive, building real-time surveillance capacity to act before crises erupt.
Guarding the Middle-Class Nest Egg
The story of mutual funds in India is a story of trust. For millions of households, SIPs are the first bridge to formal finance. But trust is fragile. The Franklin freeze showed how quickly it can snap.
SEBI cannot afford to let regulatory gaps linger. The next failure in mutual funds will not just be a scandal — it could be a systemic shock. India’s dream of creating a broad-based, retail-driven capital market depends on ensuring that “Mutual Funds Sahi Hai” is more than a slogan. It must be a promise.
(This is an opinion piece, and views expressed are those of the author only)
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